22 May Are we going to be hit with a Dreaded Recession? 2020-21 Finance and Market Forecast
– with Cedric Bigard
Cedric Bigard is a stockbroker for a large American Bank and follows the U.S stock market to advise institutional investors on what to buy, what to sell in the Equity Market, and when. Cedric, goes through daily reports provided by his research team across all sectors of the economy. He analyses, filters, and provides a customised solution for his clients, (asset managers running multi-million/billions of dollars of assets) according to their profile, investment mandates, and interest. Through his firm, Cedric also has access to Top Management of US Corporates and leverages those relationships to complement the market intelligence provided by his research department.
Let’s face it, this is uncharted territory—in modern history, we’ve never had to deal with anything like COVID-19, and the global economic shutdown that has followed. However, here we are, trying to hold the economy until we get the all-clear to go back to “normal” life. What is your understanding of the market at the moment?
As you pointed out, this is unprecedented. This is why there was a bit of panic in the Market when the virus started to peak, so for instance, at the beginning of the year before the crisis, the S&P 500 (which is an index of the 500 most important companies in the U.S.) is supposed to give a good representation of the market. The index was at 3400. In just a month, between the end of February, the beginning of March and late March, the index fell to 2200, which was the lowest point.
So basically the index lost roughly 35% of its value, meaning that 35% of the value of those companies completely disappear. That was unprecedented to see such a rapid sell-off in the Market.
We saw that happen in 2008 but the speed of the deceleration of the sell-off this time was really crazy, and the reason is because we’re dealing with something that we don’t really understand, that we don’t know, we don’t yet have a solution or know the impact of closing our borders and paralysing the economy.
Investors have had a tough time to really understand what would be the impact on the fundamentals of those companies, you know, in terms of loss of revenue, loss of profits. How those companies would adjust, and there is one thing that the Market hates the most… uncertainty! So that’s what created a big panic.
Talking about recession might be too early though it seems like more of a formality at this point. What can we expect from the market after this crisis is over? What might the recovery look like?
Let’s take a step back. I think, there is a distinction to be made between the Market and the Economy. Right now the economy is certainly going into recession. So, in the first quarter (Jan-Mar) the economy in the U.S. shrank by -4.8% if you think about it, we started to close the economy in the U.S. and many other countries, in March, right? not before. So, in only one month out of the quarter, we are already at -4.8%. It will be interesting to see, what we will see in the second quarter (Apr-Jun).
We can assume that a big part of the second quarter will be bad. The numbers will probably be worse even than Q1, but you need two consecutive difficult quarters to officially be in a recession. It is almost 99% sure that we will officially be in recession this year. Not only in the U.S. but globally. Just today for instance, the head of the European Central Bank, Christine Lagarde, estimated that over the course of this year in Europe, and in the Euro Zone, the economy will shrink by -12% so, I’d say we are officially in a recession.
Now, the question is, when are we going to get out – is it as soon as we open the economy?
A Bear Market is when the market goes down. When the Market goes up, it is a Bull Market. The Bear Market happens officially when you are below 20% of what was in the top-level. So, as I said, in the U.S. the S&P was at 3400. As soon as we crossed 20% below that level, we officially entered the Bear Market. To enter the Bull Market it has to be in the other way; you need to be up 20% compared to the bottom.
What’s interesting is we already exited the Bear market, as we had a crazy recovery and now the S&P, as of today, is at 2900. It recovered two-thirds of the losses caused by COVID-19 in a matter of not even two months!
The Market by nature is very forward-looking and at the moment everyone is kind of FOMO (fear of missing out). The Market has rebounded so quickly, that it’s accelerating in gains and everyone is jumping in! Everyone wants to invest some money in the Stock Market because they think it’s a crazy opportunity to make a lot of money and become rich and stuff like that.
We’ve been talking for the past two months about what the Market trajectory would look like, so we have the “V “ shape – Quick sell-off but the rebound is as quick. This is kind of the shape that the market is looking right now. At some point we were talking about “U” shape – the bottom takes a bit longer, but then you recover as quickly.
However, it is clear that there is a disconnect between the Economy and the market behavior. With all those people that lost their jobs and the big impact on the economy, the Market is currently ignoring all those facts.
I’m wondering if we will see a “W” shape – we went too quick too high and maybe we’re going to retest a little bit the bottom. Maybe not now, you know, like right now there’s going to be a lot of optimism, people will go out, it’s summertime, people will consume again and then we’re going to have elections in the U.S. Candidates will promise a lot of things that would be good for the Market. But, once we pass this and we start getting Q3 and Q4 numbers towards the end of the year, I’m just worried that those numbers could come below expectations.
Talking more about this recovery side of the market, which strategy have you seen that businesses are taking in order to recover?
I think it’s been a combination of things, with most of the businesses being closed they have tried to cut costs as much as they could, reallocate Marketing initiatives-and I think that this point would be the most interesting to you specifically – Rethink their business model to switch to a more digital way, with people being able to order online and get stuff delivered.
Just last night we published a report on U.S. Banks on where we are seeing more and more people using digital banking. Our generation has been using digital banking for a long time already, and I can’t remember the last time I walked into a bank, but you can see the increase in parent and grandparent users, that were a bit more reluctant to adapt to that way of dealing with your bank account in the first place. With COVID-19 people didn’t have a choice.
There’s been an acceleration that switched people to digital, and actually those people are giving good feedback about their experience using digital banking.
I can use another sector, for example; Health Care. One of the most successful companies these days in healthcare is the U.S. company Teladoc, which offers appointments online with doctors. The same thing, the feedback has been amazing, a huge increase in appointments and people using this service. Amazon is another company that is performing very well, with people ordering more stuff online. Zoom is an example of what we’re using right now to stay connected. Their stock has performed very well, alongside a huge increase in membership, and so on.
Basically digital aspects of the economy are thriving, something we knew was the future but COVID-19 accelerated that transition.
In your view which sectors have a higher growth potential at the moment?
I would say Technology and Healthcare, Technology. Why? Because we’re going all-digital, we’re using more and more data, and it’s increasing the requirement for data management in the cloud. This infrastructure is becoming very, very important. Google and Microsoft published their cloud numbers and they were up massively, something like 55% or 58%. I think we’re going to see that in the Amazon report published with their numbers tonight, and the AWS numbers are going to be huge as well.
I think those companies will keep winning and also -for evident reasons- Health Care. There have been huge opportunities for this sector (vaccine, test for population), so Health and Technology I think, longer-term will remain a focal point.
One more sector that I will add is “Renewables”. I personally like very much Renewable Energy and think companies investing in wind, solar, all this kind of technology is also a sector that will show substantial growth.
In 2008 we experienced the credit crunch where the global banking system became short of funds and collapsed. The market took 5 years to recover – What can we learn for this experience?
It’s a good point. Every crisis is different in nature and in my opinion, I think the 2008-2009 crisis was probably worse than this one, at least for the economy. I am saying fewer people probably died in the 2008-2009 crisis, but in terms of economy it was a structural issue within the system, but what we are seeing right now with COVID-19, is something transitional in nature and it’s not a reflection of something bad that we did.
History has shown us that we can face viruses and that we just need to deal with it, but the Market repercussions will disappear much quicker than what we had in 2008-2009. We can see that Governments and central banks in the world were much more reactive than they were in 2008-2009. We are seeing coordinated actions from them, in terms of monetary policy to lower rates, help companies to borrow money or at least to lower their debt burden, at the time they basically can not make any revenues. And at the same time, you’ve seen some Government stimulus for supporting the economy. For instance, here in the UK and France if you are not going to work the Government is actually paying for your salary. It’s not the case in the U.S. but they have been implementing other forms of stimulus for people in most need.
So, definitely there have been coordinated actions for economies around the world to support the economy. I personally think that recovery will happen. It may take a little bit longer and not just two months, as the market is saying right now, but I don’t think it will take five years to cover. I think next year we’ll be fine. Once this virus is behind us and hopefully we have a vaccine we can move on because, before this virus, the economy was doing very well.
I don’t have a crystal ball – I’m just giving you my thoughts about the market and what I think will happen. We can come back to this conversation in a few months and see what came true!
In terms of the bigger picture, I think there is a transition, a structural change, happening right now in our generation and in our economy. There is really a shift to digital, more and more stuff is happening digitally. I think BRANDS need to adapt. To adapt their businesses towards this digital future.
This is time for BRANDS to become “Digital” and this is key. It was happening before COVID_19 and will continue even more after COVID_19.
This virus was just a catalyst to accelerate that transition and now people realise how important digital market access is. I think people want to deal with BRANDS that are more social and more responsible.
If I was an entrepreneur, if I had a business today, I would definitely orientate my business towards socially responsible and shift to digital. This is the now and the future.